Article excerpt

For two generations, the economic performance of the Arab countries of the Middle East has been middling: worse than East Asia, better than sub-Saharan Africa--the other region most profoundly marked by arbitrary borders and weak states--and about the same as Latin America and South Asia. Not the worst, not the best, falling behind the West. Yet while there has been no crisis in the past--indeed, on some social indicators progress has been spectacular--the region now faces an imminent challenge: how to create jobs for the large cohort of young people reaching working age. The task is immense and the stakes are high: over the next decade or so, the region may experience population growth of 150 million people--the equivalent of adding two Egypts. Only in a few small Gulf oil producers is the median age projected to reach thirty. Rising labor force participation by women only increases the pressure. The region is a demographic time-bomb.

The picture is not entirely bleak: growth has accelerated in recent years, and some countries in the region are benefiting enormously from relatively high oil prices. Whether this growth acceleration or the recent level of oil prices will be sustained is an open question. In any event, the impact of this windfall is felt unevenly across the Arab world.

Merely maintaining past performance will be insufficient to generate the necessary jobs. One method of rapidly creating a sustainable increase in employment is through an expansion of labor-intensive manufacturing or services exports. But outside the petroleum sector, the region's track record is inauspicious. Forget China and India: in one recent year the Philippines generated more manufactured exports than the entire Arab world. And until the recent oil-fueled expansion of intraregional foreign direct investment, the region typically attracted less foreign direct investment than Sweden. The Arab world risks being left behind at precisely the moment it needs to accelerate job growth.

Achieving that goal is inhibited by two factors, one institutional, the other political. The Arab countries score poorly on a nexus of indicators relating to cross-border economic integration and the transfer, dissemination, and application of technological knowledge and innovation. Outside of the special cases of the extractive industries such as oil and tourism, where geology or special attractions like the Pyramids confer unique and irreproducible advantages, as a group the Arab countries appear to have weak linkages to the outside world, whether measured in terms of merchandise trade, import of capital goods (which embody technological advances from abroad), cross-border investment, integration into trans-border supply networks, technology licensing, and internationally recognized intellectual achievements. In short, the neural synapses that would link the latent productive possibilities of the Arab people with the goods and services demanded in the global market appear to be weak or nonexistent.

Building such links presents a formidable challenge. Unlike issues of macroeconomic policy management--where policy change can be implemented by a relatively small number of centrally placed technocrats and is subject to relatively straightforward feedback mechanisms to facilitate benchmarking progress--addressing the institutional weaknesses requires a much more prolonged and uncertain slog.

The hesitancy to reform stems from concerns more fundamental than mere special-interest politics. While the region's contemporary economic performance may not be distinctive, its enduring political authoritarianism is. This lack of political dynamism in the face of underlying social change together with the increasingly religious orientation of the political opposition paradoxically raises the possibility of abrupt transitions or regime changes. Intermittent terrorist incidents further elevate the risk premium. Such deep political uncertainty discourages behavior that involves irreversibility--from investment to a reversal of the brain drain--and creates the possibility of a self-reinforcing downward spiral. …